It’s no secret to anyone in the commercial real estate industry that retail leasing transaction volume has slowed.
Commercial real estate reached the height of its resurgence, amid the full bloom or our “economic recovery,” roughly 18 months ago.
In the ensuing months, however, deal velocity has slowed, and fewer leases are getting done. This isn’t to say the market has ground to a halt or is anywhere near careening off a cliff. If anything, the recent down-turn is normalization. The huge upswing in leasing transactions over the past three years was unsustainable. And the recent shift is not unlike a correction in an inflated and over-valued stock market.
Key Factors Contributing to the Current Retail Leasing Decline
While “corrections” are inevitable in any market, there are three specific factors underling this latest falloff.
The Economy is BOOMING!
First and foremost, the economy is exceptionally strong. Commercial enterprises of all stripes are prospering in a financially stable environment that shows no signs of erasure. And this is particularly true among small businesses, which comprise a dominant chunk of retail strip center tenants.
Meanwhile, much of retail leasing volume hinges on turnover. In many cases… A new tenant goes in, and either their business fails before the term of the lease is up and they vacate. Or, they hang on until the end of their lease but chose not to renew because their business is ultimately unprofitable.
And this fairly consistent turnover creates a stead volume of vacancy, which in turn leads to new deals.
But given the economy’s remarkable strength currently, few strip center businesses are failing. In fact, a great many small businesses are more profitable than ever!
Inventory is Exceptionally Low
Secondly, much of the vacancy that blighted retail shopping centers in the depths of the “great recession” has been reabsorbed. This is particularly true of top-tier, A and B quality spaces (which command the steepest rents).
In essence, the aforementioned thriving economy has driven vacancies down to extraordinarily low rates. And as a result, there is simply very little desirable inventory available at the moment.
Many Landlords Are Harboring Unrealistic Rental Rate Expectations
The third factor, however, is actually the biggest culprit behind the slowing deal volume in the retail strip center segment.
And that factor is? Unrealistic expectations among strip center landlords on the rental rates their remaining vacancies are able to command.
As already noted, the vast majority of A and B quality space has been snapped up. These are your Main + Main locations, end-caps, high street visibility units, and the other highly desirable spaces.
So, what’s remaining? These are your C, D and E quality spaces. Centers a bit off the beaten path, elbow units, obstructed in-line spaces, and other less than desirable sites.
Ultimately, however, these spaces can, and should, lease as well. As the only saying goes… “Everyone (in this case, every tenant) has their price.” But the cold, hard reality is C, D and E quality spaces command lower rents. And the “price” these types of units should be offered at is markedly lower than A and B quality spaces.
Low inventory, however, has sent retail rents skyrocketing. And many strip center landlords have either been spoiled by the high dollar deals they’ve secured on A and B quality space or are pining for deals they’ve heard of other owners transacting on similar space.
Meanwhile, these landlords are being completely unrealistic about the quality of their remaining C, D and E vacancies. In short, they’re looking for A and B quality rental rates on C, D and E quality space.
It’s high time to gain some perspective on the quality of your product. C, D and E quality spaces are inherently flawed. Poor location, low visibility, obscure size, etc… make these units distinctly less desirable.
And less-than-desirable spaces do not command top dollar rents. It’s simply a fact. Thus, it’s time to stop comparing your C, D and E quality spaces to A and B space, be realistic about the value of
these units, and ask for reasonable rents.
Need Help Leasing A Long-Lingering Vacancy in Your Shopping Center?
Are you one of the landlord’s struggling to fill a difficult to lease space? CBM’s industry-leading leasing team is here to help! Our crew has leased PLENTY of seemingly UNLEASABLE space in our 30+ year tenure in SoCal retail real estate. And our agents know exactly what it takes to lease your vacancy.
For additional information about our leasing services or to hire a CBM leasing agent to lease your shopping center, please visit our Services page: cbm1.com/services